FTTH Justification

Kris Price of the New Zealand FTTH Blog asks a question that has been on my mind for the past five years: "Why is it that FTTH has had to face a far more stringent test of its business case than the billions of dollars poured into roads every year in this country?"  Lawarence Keyes, writing for Burlington Free Press, made a similar point in an article posted today, titled "My Turn: Too bad broadband isn't a bridge".

At the same time that Seattle residents face multi-billion dollar tax supported transportation projects -- many of which are primarily automobile, not mass transit, projects -- a proposal to spend less than $500 million (which would be paid back through subscriber revenue, not tax revenue) to connect every home and business in the City via fiber optics has to be studied to death before some of our local leadership is willing to support the plan. 

We're going to build another floating bridge across Lake Washington to replace the aging Evergreen Point Floating Bridge (SR 520 Bridge).  Let me repeat that: we're going to build a bridge out of concrete and steel that will FLOAT on a lake.  Sure,...we've done it a couple times before but it's going to cost us $4.35 billion this time.  We don't even know where we're going to get $2.36 billion of the money, yet.  When Seattle's Mayor and City Council asked the state to modify its plans and convert the carpool lanes to transit lanes, our Governor freaked.  So, we're spending $4.35 billion on what amounts to another automobile-only transportation project.

Did I mention that were going to take down an elevated highway and replace it with a giant tunnel underneath the City?  That's going to cost us $4.2 billion. It, too, will only serve automobile drivers.

These are just two of the costly, tax-supported projects in our region.   Why then does it take so much more work to get a commitment on a project that would serve every resident of the City, not require tax revenue, keep more local money in the local economy, and result in greater economic opportunity for the region?  This isn't speculation.  Studies on municipal-fiber projects contain case study after case study on the realized benefits for communities who undertake such projects (i.e., cost reductions, economic development, social justice, etc.).  Additionally, several other studies report on the benefits of broadband (which, by association, should prove even more true for fiber projects).  Here's a short reading list if you think there is any question or that I'm overstating the benefits:

• Public Technology Institute's book, Municipal & Utility Fiber Optics Guidebook
• FTTH Council's paper, Understanding the Benefits of Municipal Broadband
• Paul E. Green Jr.'s book, Fiber to the Home: The New Empowerment
• Jim Baller's report, Bigger Vision, Bolder Action, Brighter Future
• Broadband Properties Magazine's archive of economic impact articles.
• Sacramento Regional Research Institute report, "Economic Effects of Increased Broadband Use in California"
• Dr. Catherine A. Middleton's paper, "Understanding the Benefits of Broadband: Insights for a Broadband Enabled Ontario"
• The Brookings Institution paper, "The Effects of Broadband Deployment on Output and Employment: A Cross-sectional Analysis of U.S. Data"
• MIT and Carnegie Mellon University Final Report Prepared for the U.S. Department of Commerce, "Measuring Broadband's Economic Impact"

The substantially less amount of literature critical of municipal fiber or broadband projects leave a relative cost-benefit analysis out of the equation entirely (i.e., are the benefits of spending $4.35 billion of tax dollars on a floating bridge less than the benefits of spending $500 million of subscriber returned dollars on a fiber to the home utility).  Instead, they begin with the premise that municipal "intervention" in communications services is inherently unfair because there is almost always a private entity already providing communications services in the community.  This dogmatic perspective both denies a communities' right to self-determination and allows for any number of radical claims about how municipal fiber and broadband networks are, in fact, detrimental to a community.  One such report -- Balhoff & Rowe, LLC's "Municipal Broadband: Digging Beneath the Surface" -- makes the following anti-municipal argument (among many):

Municipalities are positioned to distort the competitive marketplace by using their advantages in terms of tax-avoidance, low-cost access to capital where the loans are secured against other municipal assets, anti-competitive awarding of government contracts, and misuse of the government's position as regulator, among others. (Slide 74)

Still, it's worth mentioning that there are arguments being made against municipal fiber networks -- they just aren't convincing in their rhetoric or as they relate to other municipal responsibilities (e.g., roads, utilities, schools, etc.).  It's as if they pretend that "distortion" (as they call it) in some marketplaces is valid while in others it is illegitimate prima facie.

Our local PBS station, KCTS 9, aired a new documentary last night about the underground hydro-electric project at Snoqualmie Falls.  The show was peculiarly captivating¹.  A young, bankrupt businessman and engineer – Charles H. Baker – conceived of the idea in the late 1890s to build a hydro-electric generation plant 250 feet below the Snoqualmie River, just before the falls.  At that time in history, electric power was being generated – when it was even available – by small, coal-fired steam plants.  The dominant power technology (Edison’s Direct Current) could only transmit power for about a mile, requiring that neighborhood power plants dot the cityscape.  Tesla’s competing Alternating Current (AC) electric systems could transmit power much further, which would be the necessary if power generated at Snoqualmie Falls were to reach the Seattle market some 30 miles to the West.

As the documentary progressed, I waited with baited breath to hear what went wrong – what dashed Baker’s dreams of electrifying the region with hydro-electric power from the Snoqualmie Falls.  Was it that nothing similar had ever been done before?  Was it the smear campaign waged by detractors of the project who claimed that it would never work and circulated misinformation, such as the lie that the Snoqualmie River ran dry during the summer and froze solid during the winter?  To my surprise, the documentary continued to tell of how Baker persevered in the face of one challenge after another.  Not only did he build the underground generation plant at Snoqualmie Falls, but the generation plant is still there and operational! The same equipment built over a hundred years ago is still producing power for the region!  I was dumbfounded.  I had never heard about a power generation facility at the Falls.

Watching the documentary further, parallels between Baker’s hydro-power project and Seattle’s Fiber to the Home project struck me as palpable.  It’s not that a municipal Fiber to the Home network is entirely unique today², unlike an underground hydro-electric plant then.  Instead, it was incredible to realize that Seattle finds itself, today, at a similar precipice to what we faced more than a hundred years ago.

In the final days of the Nineteenth Century, Seattle was served by a small number of electric producers who generated power using an inferior technology (i.e., Direct Current from coal-fired steam generators).  It was costly and severely limited in transmission distance.  A technological innovation (i.e., Alternating Current from hydro power) resulted in less costly power with none of the same transmission distance limitations³.  Incumbent power producers sought to protect their entrenched businesses through a misinformation campaign and political scheming rather than embrace the fact that a technological innovation changed the industry rules and that they would need to adapt or die.  Does this sound familiar?  If not, try replacing “Direct Current” with “Copper Pairs and Coax” and “Alternating Current” with “Fiber”.

The documentary finishes with example after example of how the power from Snoqualmie Falls was transformative to the region’s economy and the entire Country.  We have that opportunity, again.  A municipal Fiber network connecting every home and business in the City of Seattle to each other and the Internet would transform the region in a more dramatic way than any other contemporary proposal.  Replacing the 520 bridge and the viaduct are necessary transportation infrastructure projects.  Fixing the seawall and our public schools are good forward-thinking policies.   But nothing would give more opportunity to more Seattle residents form every socio-economic status than a Seattle Fiber Utility.

¹ The full-length video is embedded in this post and available at http://www.vimeo.com/5530039.
² More than fifty municipal or public utility district Fiber networks currently operate in the United States.  A list is available on page five of the FTTH Council's paper, titled "Municipal Fiber to the Home Deployments: Next Generation Broadband as a Municipal Utility".
³ The power produced at Snoqualmie Falls sold for 50% to 66% less than power produced by coal-fired steam generators [film time 00:39:42].  Municipal Fiber networks provide superior Internet, television, and phone services at a lower cost than incumbent providers without the need for tax-based financing.

What is the value of a network?  Can it be calculated as a function of its nodes (endpoints) and ties (connections between all the endpoints); or, is the value more complicated than its structure?  Robert Metcalfe – inventor of the ubiquitous computer networking protocol known as Ethernet – is credited with formulating a value calculation for telecommunications networks based on the number of connected users or devices.  Affectionately referred to as “Metcalfe’s Law”, it states the value as being proportional to the square of the number of connected users relative to any one user (v = n² – n).  In other words, the value of a network increases at a faster rate as more users are added.  This is a perfectly reasonable conception of a network’s value – especially when initially building out a network – but it isn’t a perfect conception.  What about the differential value of the various types of network ties?

Sociologist Mark Granovetter advanced the hypothesis in the early 1970s that weak ties between individuals in social networks have greater value than strong ties as a result of the diversity of information weak ties introduce into otherwise close-knit groups of like-minded individuals.  The classic example of Granovetter’s hypothesis is knowledge about job opportunities.  He found that most job opportunities that lead to actual jobs come through weak social ties – not your closest friends.  Surely there are similar factors affecting value in other types of networks.  Not all ties are equal, right?

An individual connected to the Internet through a 56kbps modem isn’t receiving the same network value as another individual connected through a 7 Mbps DSL line, even though the same number of users may be connected to the network.  That intuition should hold true when a comparison is made between a network of users connected at 10 Mbps and another network of users connected at 1 Gbps, or when a network of users are constrained by asymmetric connections (which is typical of DSL and cable Internet connections throughout the United States).  Quantifying the value of a network in terms that are more refined than just the number of connected nodes is exactly what Rob Beckstrom – CEO and President of ICANN – did in his 2009 paper “A New Model for Network Valuation”.  What’s now being called “Beckstrom’s Law” states the value of a network as the sum of all net benefits for transactions on a network (v_ij = sum(benefit) – sum(cost)).

If ever there were a justification for gigabit fiber optic connections between every home and business in a community, it would have to be Beckstrom’s Law.  A single strand of fiber optic cable can supply the bandwidth to carry more phone, television, and Internet service than any other alternative. Simply put, more bandwidth enables more transactions. Since the cost of fiber optic bandwidth is so much less than the cost of bandwidth using copper, coax, or wireless networks, Beckstrom's Law further predicts that the value of an FTTH network would be higher than those alternatives.  The same law also implies a greater value for symmetric and open networks when compared to asymmetric and closed networks (where the transactions are constrained to by upstream bandwidth limits or arbitrarily tiered service costs).

Seattle has found itself in an odd predicament. Home to the most educated population in the United States and Internet juggernauts, such as Amazon.com, its citizens and small businesses would be hard pressed to differentiate the City from the Country’s most rural communities when it comes to Internet Access. Verizon will roll up to a home in Woodinville – a community with just over 9,000 people twenty miles outside of Seattle – and install their Fiber Optic service (FiOS), but a home in Seattle is considered lucky if it is served by Comcast’s over-subscribed cable service. The situation is far more desperate for the Seattle home located in the part of the City served only by Broadstripe or Qwest. Broadstripe (f/k/a Millenium Digital Cable) has been in bankruptcy since early 2009 and is notorious for its poor quality television and Internet services; Qwest only pretends to provide high-speed Internet and might as well be in bankruptcy. Without a competitive threat, Comcast operates with a minimal investment in their local network so as to extract as much profit as possible from the community.

Seattle is a perfect example of the somewhat rare “market failure”. There exists a more efficient outcome – where participants in the market would expect higher gains – than the existing outcome (to use economics terminology). The higher gains to be expected in an efficient market for Seattle Internet access would be wider availability of higher speeds and lower costs. The sad fact is that – as rare as market failures may be – Seattle is not alone in market failures related to Internet Access. Most communities in the United States are served by incumbent providers who operate as de facto monopolies. Nobody should really be surprised by the slow rate at which those companies deploy new technology.

The answer to Seattle’s Internet access market failure is straightforward. Following years of unsuccessful cajoling of the industry by the City government, Seattle should take the next step and lead the build-out of a municipal Fiber To The Home (FTTH) network.  A preliminary feasibility study has already been done – a Seattle Municipal FTTH network would pay for itself. The network would also provide capabilities rarely, if ever, seen on non-municipal networks, such as: equivalent speeds on both the up and down sides of the network (i.e., symmetric bandwidth instead of the asymmetric bandwidth enjoyed on the existing DSL and cable networks); unfettered connectivity between points on the municipal network (i.e., even if your access to Facebook is only a mind numbing 100 Mbps you’ll have the full network capacity – which could be 1 Gbps or more – between your home on Beacon Hill and your office in Pioneer Square); and, not to be underestimated: network neutrality (i.e., the freedom to choose the IPTV provider Hulu instead of the CATV provider Comcast, which may be problematic if you receive your Internet service from Comcast – a company that makes most of its money from video content distribution). Seattle has a good track record in these sorts of endeavors too. They own and operate their own power company (Seattle City Light) and provide power throughout the City at a cost that is only two-thirds the National average per kilowatt hour.